Friday, November 21, 2008

Upfront payment for the TARP

These days bankers are wearing cone hats and it is almost impossible to say anything in their defence. Even if you think that something might be said, it is extremely political incorrect to do so. It is far from my intention to defend the excesses and mistakes of the financial industry, but a little calculation could be interesting. Let us assume that the financial industry as a whole paid for the past ten years $ 100bn each year in bonuses. This is a conservative figure considering the Goldman Sachs alone paid $ 16bn last year: since it is conservative we can assume that everyone paid an average 40% income tax on that amount. Compounded at an average interest rate the total amount exceeds $ 500bn. It is not difficult to argue that financial professionals are a very small burden for the state since for many things such as education, health, transportation, welfare, etc. they go private. Even if this number is too large and the actual one is somewhat smaller, it still covers a considerable share of the TARP fund amount. All this is to mitigate the public outrage at the industry making a mess and then asking the taxpayer to bear the burden: a lot of it was paid upfront by the industry members themselves.